Growing Income Gap Between the Top and the Middle

Information from the biennial Minnesota Tax Incidence Study (MTIS) confirms in greater detail what was already known in a broad sense—income inequality in Minnesota is increasing over time. Using data from the thirteen published Incidence Studies, part 1 of this series documented the increased concentration of income among the five percent of households with the highest incomes, with the concentration of income growing especially rapidly among the top one percent.

As the share of total income concentrated at the top increases, the share of income going to other households shrinks, resulting in an expanding income disparity. The growth in this disparity can be demonstrated by examining the income of the top one percent relative to that of households in the middle of Minnesota’s income distribution. For purposes of this analysis, “middle-income households” will be defined as the twenty percent of households in the exact middle of the income spectrum, otherwise referred to as the middle quintile. This middle-income quintile consists of households in the fifth and sixth deciles, as defined in the MTIS. The 2012 annual income range of the middle quintile extends from $33,334 to $56,666. The top one percent consists of households with 2012 incomes in excess of $493,603.

In 1988, the total income of the top one percent equaled 93 percent of the income of middle quintile; in other words, the total income of the top 1 percent was seven percent less than that of the middle twenty percent. The income of the top one percent relative to that of the middle quintile generally increased over the next quarter century, although the growth was sporadic, interrupted by temporary declines in the share of total income accruing to the top one percent as a result of reduced capital gains realizations, which coincide with recessions. (This phenomenon was described more fully in part 1.)

Since 1994, the income of the top one percent has exceeded that of the middle quintile. By 2012, it was 49 percent greater than that of the middle quintile. By 2017, the income of the top one percent will be 52 percent greater than that of the middle quintile, based on projections from the 2015 MTIS. These trends are shown in the left (blue) axis in the chart below.

Given that there are twenty times more households in the middle quintile than in the top one percent, the average income per household of the top one percent is multiple times greater than that of the middle quintile—a disparity which is steadily increasing over time. The ratio between the average incomes of these two groups is shown in the right (green) axis in the above chart. The average income of the top one percent was 18.6 times greater than that of the middle quintile in 1988. This disparity increased to 29.9 times greater in 2012. In 2017, the ratio of the average income of the top one percent to that of the middle quintile is projected to exceed 30 to 1 for the first time during the period for which MTIS data is available, extending back to 1988.

It is difficult to make precise comparisons between income data from Minnesota Tax Incidence Studies and other data sets which extend back to the 1920s. However, it appears likely that the disparity in income between the top one percent and middle-income households is approaching—or possibly matching—the disparity reached ninety years ago, on the eve of the Great Depression.

It is a troubling sign for the state’s economy when an increasing share of income is concentrated in fewer and fewer hands. The growth in income disparity between the top one percent and middle-income households becomes even more striking after we adjust for the effects of inflation. More on this in part three of this series.

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North Star Policy Institute is a progressive think tank that advances awareness and discussion about state-level public policies. We produce original research, articles, reports, and commentaries that center the priorities of Minnesota’s working people and families.